The American Express Company, often abbreviated Amex, AmEx, AX or Amexco, is a global provider of financial services based in New York City, USA. The company is best known for its charge card, credit card, and traveler's cheque businesses.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to ---------------- ---------------- Commission file number 1-7657 AMERICAN EXPRESS COMPANY ------------------------ (Exact name of registrant as specified in its charter) New York 13-4922250 -------------- ----------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) World Financial Center, 200 Vesey Street, New York, NY 10285 - ----------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 640-2000 -------------- None - ----------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at April 30, 1999 - ---------------------------------------- ----------------------------- Common Shares (par value $.60 per share) 450,552,274 shares
AMERICAN EXPRESS COMPANY FORM 10-Q INDEX Page No. Part I. Financial Information: Consolidated Statements of Income - Three months ended March 31, 1999 and 1998 1 Consolidated Balance Sheets - March 31, 1999 and December 31, 1998 2 Consolidated Statements of Cash Flows - Three months ended March 31, 1999 and 1998 3 Notes to Consolidated Financial Statements 4-6 Review Report of Independent Accountants 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8-23 Part II. Other Information 24
<TABLE> <CAPTION> PART I--FINANCIAL INFORMATION AMERICAN EXPRESS COMPANY CONSOLIDATED STATEMENTS OF INCOME (dollars in millions, except per share amounts) (Unaudited) Three Months Ended March 31, ------------------ 1999 1998 ------ ------ <S> <C> <C> Revenues: Discount revenue $1,514 $1,429 Interest and dividends, net 795 810 Management and distribution fees 522 418 Net card fees 403 398 Travel commissions and fees 426 351 Other commissions and fees 417 409 Cardmember lending net finance charge revenue 347 317 Life and other insurance premiums 123 113 Other 424 276 ----- ----- Total 4,971 4,521 ----- ----- Expenses: Human resources 1,431 1,234 Provisions for losses and benefits: Annuities and investment certificates 334 370 Life insurance, international banking, and other 157 364 Charge card 182 218 Cardmember lending 235 218 Interest 234 226 Occupancy and equipment 308 283 Marketing and promotion 297 265 Professional services 281 230 Communications 122 109 Other 599 390 ----- ----- Total 4,180 3,907 ----- ----- Pretax income 791 614 Income tax provision 216 154 ----- ----- Net income $575 $460 ===== ===== Earnings Per Common Share: Basic $1.28 $1.00 ==== ==== Diluted $1.26 $0.98 ==== ==== Average common shares outstanding for earnings per common share (millions): Basic 447.7 460.7 ===== ===== Diluted 456.2 469.5 ===== ===== Cash dividends declared per common share $0.225 $0.225 ===== ===== </TABLE> See notes to Consolidated Financial Statements. 1
<TABLE> <CAPTION> AMERICAN EXPRESS COMPANY CONSOLIDATED BALANCE SHEETS (millions) (Unaudited) March 31, December 31, Assets 1999 1998 - ------ ------ ------ <S> <C> <C> Cash and cash equivalents $5,438 $4,092 Accounts receivable and accrued interest: Cardmember receivables, less reserves: 1999, $491; 1998, $524 18,559 19,176 Other receivables, less reserves: 1999, $89; 1998, $75 3,446 3,048 Investments 40,776 41,299 Loans: Cardmember lending, less reserves: 1999, $593; 1998, $593 14,733 14,721 International banking, less reserves: 1999, $218; 1998, $214 5,057 5,404 Other, net 942 929 Separate account assets 28,244 27,349 Deferred acquisition costs 3,015 2,990 Land, buildings and equipment--at cost, less accumulated depreciation: 1999, $2,109; 1998, $2,067 1,732 1,637 Other assets 6,355 6,288 ------- ------- Total assets $128,297 $126,933 ======= ======= Liabilities and Shareholders' Equity - ------------------------------------ Customers' deposits $9,998 $10,398 Travelers Cheques outstanding 5,769 5,823 Accounts payable 6,315 5,373 Insurance and annuity reserves: Fixed annuities 21,036 21,172 Life and disability policies 4,312 4,261 Investment certificate reserves 5,123 4,854 Short-term debt 22,242 22,605 Long-term debt 7,176 7,019 Separate account liabilities 28,244 27,349 Other liabilities 7,797 7,881 ------- ------- Total liabilities 118,012 116,735 ------- ------- Guaranteed preferred beneficial interests in the Company's junior subordinated deferrable interest debentures 500 500 Shareholders' equity: Common shares, $.60 par value, authorized 1.2 billion shares; issued and outstanding 450.0 million shares in 1999 and 450.5 million shares in 1998 270 270 Capital surplus 4,930 4,809 Retained earnings 4,312 4,148 Other comprehensive income, net of tax: Net unrealized securities gains 373 583 Foreign currency translation adjustments (100) (112) ------- ------- Accumulated other comprehensive income 273 471 ------- ------- Total shareholders' equity 9,785 9,698 ------- ------- Total liabilities and shareholders' equity $128,297 $126,933 ======= ======= </TABLE> See notes to Consolidated Financial Statements. 2
<TABLE> <CAPTION> AMERICAN EXPRESS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (millions) (Unaudited) Three Months Ended March 31, ------------------- 1999 1998 ------ ------ <S> <C> <C> Cash Flows from Operating Activities Net income $575 $460 Adjustments to reconcile net income to net cash provided by operating activities: Provisions for losses and benefits 576 835 Depreciation, amortization, deferred taxes and other 66 (63) Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: Accounts receivable and accrued interest (410) 242 Other assets (98) 58 Accounts payable and other liabilities 868 (55) Decrease in Travelers Cheques outstanding (52) (60) Increase in insurance reserves 40 37 ----- ----- Net cash provided by operating activities 1,565 1,454 ----- ----- Cash Flows from Investing Activities Sale of investments 341 462 Maturity and redemption of investments 2,334 1,827 Purchase of investments (2,367) (2,499) Net decrease in Cardmember receivables 237 1,200 Proceeds from repayment of loans 5,605 5,584 Issuance of loans (5,464) (5,353) Purchase of land, buildings and equipment (198) (67) Sale of land, buildings and equipment 7 7 Acquisitions, net of cash acquired (17) (44) ----- ----- Net cash provided by investing activities 478 1,117 ----- ----- Cash Flows from Financing Activities Net (decrease) increase in customers' deposits (233) 407 Sale of annuities and investment certificates 1,282 1,337 Redemption of annuities and investment certificates (1,196) (1,348) Net decrease in debt with maturities of three months or less (728) (2,218) Issuance of debt 3,544 1,788 Principal payments on debt (2,991) (1,710) Issuance of American Express common shares 77 25 Repurchase of American Express common shares (334) (494) Dividends paid (101) (105) ----- ----- Net cash used by financing activities (680) (2,318) ----- ----- Effect of exchange rate changes on cash (17) (90) ----- ----- Net increase in cash and cash equivalents 1,346 163 Cash and cash equivalents at beginning of period 4,092 4,179 ----- ----- Cash and cash equivalents at end of period $5,438 $4,342 ===== ===== </TABLE> See notes to Consolidated Financial Statements. 3
AMERICAN EXPRESS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The consolidated financial statements should be read in conjunction with the financial statements in the Annual Report on Form 10-K of American Express Company (the Company or American Express) for the year ended December 31, 1998. Significant accounting policies disclosed therein have not changed. Certain reclassifications of prior period amounts have been made to conform to the current presentation. Cardmember Lending Net Finance Charge Revenue is presented net of interest expense of $156 million and $161 million for the first quarter of 1999 and 1998, respectively. Interest and Dividends is presented net of interest expense of $121 million and $141 million for the first quarter of 1999 and 1998, respectively, related primarily to the Company's international banking operations. The interim financial information in this report has not been audited. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position and the consolidated results of operations for the interim periods have been made. All adjustments made were of a normal, recurring nature. Results of operations reported for interim periods are not necessarily indicative of results for the entire year. 2. Accounting Development In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The SOP, which has been adopted prospectively as of January 1, 1999, requires the capitalization of certain costs incurred after the date of adoption to develop or obtain software for internal use. The Company's policy had been to expense such costs as incurred. The amounts capitalized will be amortized straight line over a five-year period. See the consolidated section of Management's Discussion and Analysis of Financial Condition and Results of Operations for further information. 4
<TABLE> <CAPTION> 3. Investment Securities The following is a summary of investments at March 31, 1999 and December 31, 1998: March 31, December 31, (in millions) 1999 1998 --------- ------------ <S> <C> <C> Held to Maturity, at amortized cost (fair value: 1999, $10,397; 1998, $11,144) $9,963 $10,526 Available for Sale, at fair value (cost: 1999, $25,888; 1998, $25,895) 26,488 26,764 Investment mortgage loans (fair value: 1999, $4,021; 1998, $4,089) 3,899 3,840 Trading 426 169 ------ ------ Total $40,776 $41,299 ====== ====== </TABLE> 4. Comprehensive Income Comprehensive income is defined as the aggregate change in shareholders' equity, excluding changes in ownership interests. For the Company, it is the sum of net income and changes in (i) unrealized gains or losses on available-for-sale securities and (ii) foreign currency translation adjustments. The components of comprehensive income, net of related tax, for the three months ended March 31, 1999 and 1998 were as follows: <TABLE> <CAPTION> Three Months Ended March 31, ------------------ (in millions) 1999 1998 ------ ------ <S> <C> <C> Net income $575 $460 Change in: Net unrealized securities gains (210) (17) Foreign currency translation adjustments 12 (2) --- --- Total $377 $441 === === </TABLE> 5. Taxes and Interest Net income taxes paid during the three months ended March 31, 1999 and 1998 were approximately $97 million and $63 million, respectively. Interest paid during the three months ended March 31, 1999 and 1998 was approximately $588 million and $636 million, respectively. 5
<TABLE> <CAPTION> 6. Earnings per Share The computations of basic and diluted earnings per common share (EPS) for the three months ended March 31, 1999 and 1998 are as follows: (in millions, except per Three Months Ended share amounts) March 31, ------------------ 1999 1998 ------ ------ <S> <C> <C> Numerator: Net income $575 $460 Denominator: Denominator for basic EPS - weighted-average shares 447.7 460.7 Effect of dilutive securities: Stock Options and Restricted Stock Awards 8.5 8.7 Other - 0.1 ----- ----- Potentially dilutive common shares 8.5 8.8 ----- ----- Denominator for diluted EPS 456.2 469.5 ----- ----- Basic EPS $1.28 $1.00 ----- ----- Diluted EPS $1.26 $0.98 ----- ----- </TABLE> <TABLE> <CAPTION> 7. Segment Information Results for the Company's operating segments, based on management's internal reporting structure, are as follows: Revenues Three Months Ended March 31, ------------------ (in millions) 1999 1998 ------ ------ <S> <C> <C> Travel Related Services $3,421 $3,083 American Express Financial Advisors 1,345 1,221 American Express Bank/ Travelers Cheque 247 257 Corporate and Other (42) (40) ----- ----- Total $4,971 $4,521 ===== ===== <CAPTION> Net Income Three Months Ended March 31, ------------------ (in millions) 1999 1998 ------ ------ <S> <C> <C> Travel Related Services $363 $315 American Express Financial Advisors 214 186 American Express Bank/ Travelers Cheque 41 (83) Corporate and Other (43) 42 --- --- Total $575 $460 === === </TABLE> 6
INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Shareholders and Board of Directors American Express Company We have reviewed the accompanying consolidated balance sheet of American Express Company (the "Company") as of March 31, 1999 and the related consolidated statements of income and cash flows for the three-month periods ended March 31, 1999 and 1998. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of the Company as of December 31, 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for the year then ended (not presented herein), and in our report dated February 4, 1999, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1998 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Ernst & Young LLP New York, New York May 14, 1999 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Consolidated Results Of Operations For The Three Months Ended March 31, 1999 The Company's consolidated net income and diluted earnings per share rose 25 and 29 percent in the three month period ended March 31, 1999, respectively. The year-ago results included several items: a $138 million ($213 million pretax) credit loss provision at American Express Bank relating to its Asia/Pacific portfolio and income in the Corporate and Other segment of $78 million ($106 million pretax) comprising a gain from the sale of First Data Corporation shares and a preferred stock dividend based on Lehman Brothers earnings. Excluding these items, income and diluted earnings per share increased 11 and 14 percent, respectively. The Company's return on equity was 25.1 percent. Consolidated revenues rose 10 percent for the three months ended March 31, 1999. Revenues, net of American Express Financial Advisors' (AEFA) provisions for losses and benefits, were up 12 percent for the three months ended March 31, 1999, reflecting an increase in worldwide billed business and Cardmember loans, higher travel commissions and fees, greater management and distribution fees and wider investment margins at AEFA. The growth in travel commissions and fees primarily resulted from acquisitions during the latter part of 1998, which increased revenues and expenses but did not have a material effect on net income. Consolidated expenses rose, primarily due to higher expenses related to human resources and marketing and promotion expenses to support business building initiatives and acquisitions, partially offset by lower loss provisions. These results were in line with the Company's long-term targets of: 12-15 percent earnings per share growth, at least 8 percent revenue growth and a return on equity of 18-20 percent. Due to a change in accounting rules, the Company is required to capitalize software costs rather than expense them as incurred. For the three month period ended March 31, 1999, this amounted to a benefit of $59 million (net of amortization). Of this amount, $47 million related to Travel Related Services and $10 million to American Express Financial Advisors. These benefits were offset by increased investment spending and therefore had no effect on net income. Consolidated Liquidity and Capital Resources In the first three months of 1999, the Company repurchased 2.6 million common shares at an average price of $114.73 per share and canceled 1.5 million common shares under its repurchase program. 8
Year 2000 The Company's Year 2000 (Y2K) compliance effort is divided into two initiatives. The first, known as "Millenniax," relates to mainframe and other technological systems maintained by the American Express Technologies organization (AET). The second, known as "Business T," relates to the technological assets that are owned, managed or maintained by the Company's individual business and staff units. Our plans for remediation of the Y2K issue include the following program phases: (i) employee awareness and mobilization, (ii) inventory collection and assessment, (iii) impact analysis, (iv) remediation/decommission, (v) testing and (vi) implementation. With respect to systems maintained by the Company, the first three phases referred to above have largely been completed for both Millenniax and Business T. In addition, the remediation/decommission phase for critical systems is nearly complete. As of March 31, 1999, for Millenniax, the remediation/decommission, testing and implementation phases for critical and non-critical systems in total are 91%, 85% and 74% complete, respectively. For Business T, such phases are 94%, 85% and 84% complete, respectively. The Company's cumulative costs since inception of the Y2K initiatives were $427 million through March 31, 1999 and are estimated to be in the range of $90 - $116 million for the remainder through 2000.* These costs, which are expensed as incurred, relate to both Millenniax and Business T, and have not had, nor are they expected to have, a material adverse impact on the Company's results of operations or financial condition.* Y2K costs related to Millenniax represent 6% and 1% of the AET budget for the years 1999 and 2000, respectively.* The Company's major businesses are heavily dependent upon internal computer systems, and all have significant interaction with systems of third parties, both domestically and internationally. The Company is working with key external parties, including merchants, clients, counterparties, vendors, exchanges, utilities, suppliers, agents and regulatory agencies to mitigate the potential risks to us of Y2K. As part of our overall compliance program, the Company is actively communicating with third parties through face-to-face meetings and correspondence, on an ongoing basis, to ascertain their state of readiness. Although numerous third parties have indicated to us in writing that they are addressing their Y2K issues on a timely basis, the readiness of third parties overall varies across the spectrum. The failure of external parties to resolve their own Y2K issues in a timely manner could result in a material financial risk to the Company. At this point, with remediation and testing of individual internal systems substantially complete, the Company's primary focus is on testing of systems on an integrated basis, independent validation of such testing and completing Y2K contingency plans. The contingency planning effort is a full-scale initiative that includes both internal and external experts under the guidance of a Company-wide steering committee. Our contingency plans, which are based in part on an assessment of the magnitude and probability of potential risks, primarily focus on proactive steps to prevent Y2K-related failures from occurring, or if they should occur, detecting them quickly, minimizing their impact and expediting their repair. The Y2K contingency plans supplement disaster recovery and business continuity plans already in place, and include measures such as selecting alternative suppliers and channels of distribution and developing our own technology infrastructure in lieu of those provided by third parties. 9
Such plans encompass the creation of both remediation and business resumption contingency plans, generally in accordance with guidelines established by the Federal Financial Institutions Examination Council. For the Company's critical systems that are not yet Y2K compliant, we are on track to achieving remediation by the second quarter of 1999*; to the extent that unforeseen circumstances arise that result in non-compliance of any such systems, remediation contingency plans are also being developed to mitigate such risk. Our business resumption contingency planning effort is divided into four phases: (i) establishing organizational planning guidelines; (ii) completing a business impact analysis; (iii) developing the business resumption contingency plans and (iv) validating and verifying the business resumption contingency plans. The first two of these phases have essentially been completed, and have identified and assessed the need for Y2K business resumption contingency plans for the Company's most critical core business processes. Such processes include, but are not limited to, credit authorization, Cardmember billing, merchant payment, client investments, funds transfer, securities settlement, and travel reservations. The contingency plans also address third party systems that the Company's businesses interface with and rely upon, such as international telecommunications networks, global financial payment and clearing systems, and airline and other travel systems. The Company expects that the development phase of its business resumption contingency plans will be substantially complete by the second quarter of 1999.* The final phase, which will include independent validation and verification of these plans, will take place during the third quarter of 1999.* The Company will continue to refine its contingency planning activities throughout 1999 as additional information related to our exposures is gathered.* To the extent that there are Y2K failures that affect major internal processes or third party systems that the Company relies upon, including but not limited to those described above, such failures could have a material impact on the Company and its businesses or subsidiaries through business interruption or shutdown, financial loss, reputational damage and legal liability to third parties. For a more complete discussion of the Y2K issue, see pages 22 and 23 of the Company's 1998 annual report to shareholders, which is incorporated by reference in the Company's 1998 10-K report. * Statements in this Y2K discussion marked with an asterisk are forward-looking statements which are subject to risks and uncertainties. Important factors that could cause results to differ materially from these forward-looking statements include, among other things, the ability of the Company to successfully identify all systems containing two-digit codes, the nature and amount of programming required to fix the affected systems, the costs of labor and consultants related to such efforts, the continued availability of such resources, and the ability of third parties that interface with the Company to successfully address their Y2K issues. 10
<TABLE> <CAPTION> Travel Related Services Results of Operations For The Three Months Ended March 31, 1999 and 1998 Statement of Income ------------------- (Unaudited) (Dollars in millions) Three Months Ended March 31, ------------------ Percentage 1999 1998 Inc/(Dec) ------ ------ --------- <S> <C> <C> <C> Net Revenues: Discount Revenue $1,514 $1,429 5.9 % Net Card Fees 403 398 1.4 Travel Commissions and Fees 426 351 21.6 Other Revenues 731 588 24.3 Lending: Finance Charge Revenue 503 478 5.1 Interest Expense 156 161 (3.2) ----- ----- Net Finance Charge Revenue 347 317 9.4 ----- ----- Total Net Revenues 3,421 3,083 11.0 ----- ----- Expenses: Marketing and Promotion 270 244 10.6 Provision for Losses and Claims: Charge Card 182 218 (16.2) Lending 235 218 7.7 Other 14 13 7.0 ----- ----- Total 431 449 (3.9) ----- ----- Charge Card Interest Expense 183 197 (6.9) Net Discount Expense 143 140 1.9 Human Resources 912 787 15.9 Other Operating Expenses 928 784 18.3 ----- ----- Total Expenses 2,867 2,601 10.2 ----- ----- Pretax Income 554 482 15.1 Income Tax Provision 191 167 14.9 ----- ----- Net Income $363 $315 15.1 ===== ===== </TABLE> The following table, which is presented for analytical purposes only, presents the effect on the above Statement of Income related to TRS' securitized receivables and loans: <TABLE> <CAPTION> Three Months Ended March 31, ------------------ 1999 1998 ------ ------ <S> <C> <C> Increase in Other Revenues $92 $77 Decrease in Lending Finance Charge Revenue (149) (106) Decrease in Lending Interest Expense 44 33 Decrease in Provision for Losses and Claims: Charge Card 51 55 Lending 47 30 Decrease in Charge Card Interest Expense 58 51 Increase in Net Discount Expense (143) (140) --- --- Pretax Income $- $- === === </TABLE> 11
<TABLE> <CAPTION> Travel Related Services Selected Statistical Information -------------------------------- (Unaudited) (Amounts in billions, except where indicated) Three Months Ended March 31, ------------------- Percentage 1999 1998 Inc/(Dec) ------ ------ --------- <S> <C> <C> <C> Total Cards in Force (millions): United States 27.9 29.5 (5.5)% Outside the United States 15.0 13.8 8.6 ---- ---- Total 42.9 43.3 (1.0) ==== ==== Basic Cards in Force (millions): United States 21.8 23.3 (6.2) Outside the United States 11.5 10.6 8.0 ---- ---- Total 33.3 33.9 (1.7) ==== ==== Card Billed Business: United States $41.6 $38.5 8.2 Outside the United States 15.2 14.1 7.2 ---- ---- Total $56.8 $52.6 8.0 ==== ==== Average Discount Rate* 2.73% 2.74% - Average Basic Cardmember Spending (dollars)* $1,781 $1,600 11.3 Average Fee per Card (dollars)* $40 $38 5.3 Travel Sales $5.3 $4.3 25.3 Travel Commissions and Fees/Sales** 8.0% 8.2% - Owned and Managed Charge Card Receivables: Total Receivables $23.5 $22.0 6.7 90 Days Past Due as a % of Total 3.0% 3.4% - Loss Reserves (millions) $876 $967 (9.4) % of Receivables 3.7% 4.4% - % of 90 Days Past Due 126% 131% - Net Loss Ratio 0.43% 0.47% - Owned and Managed U.S. Cardmember Lending: Total Loans $16.7 $14.2 17.9 Past Due Loans as a % of Total: 30-89 Days 2.1% 2.5% - 90+ Days 1.0% 1.1% - Loss Reserves (millions): Beginning Balance $619 $589 5.1 Provision 244 221 10.4 Net Charge-Offs/Other (240) (219) 9.2 --- --- Ending Balance $623 $591 5.5 === === % of Loans 3.7% 4.2% - % of Past Due 121% 117% - Average Loans $16.7 $14.2 17.3 Net Write-Off Rate 5.9% 6.3% - Net Interest Yield 9.4% 9.6% - </TABLE> Note: Owned and managed Cardmember receivables and loans include securitized assets not reflected in the Consolidated Balance Sheet. * Computed excluding Cards issued by strategic alliance partners and independent operators as well as business billed on those Cards. ** Computed from information provided herein. 12
Travel Related Services - ----------------------- Travel Related Services' (TRS) net income rose 15 percent in the first quarter of 1999 from a year ago. Net revenues increased 11 percent for the same period, reflecting higher billed business in the United States and internationally, growth in Cardmember loans and higher travel commissions and fees. The improvement in discount revenue resulted from higher billed business. The growth in billed business reflects higher spending per Cardmember, which grew due to several factors, including the benefits of rewards programs and expanded merchant coverage. Billed business grew, despite a general tightening of corporate travel and entertainment expenses and the cancellation of 1.6 million U.S. Government cards in the fourth quarter of 1998, representing approximately $3.5 billion in annualized spending, due to the Company's decision to withdraw from this business. Total cards in force declined as a result of this decision. This decrease was partially offset by substantial growth in cards outside the United States. Excluding the U.S. Government account, domestic billed business grew by 11 percent from a year ago. U.S. spending per basic Cardmember increased 16 percent from last year, reflecting strong growth in the consumer and small business areas. The increase in travel commissions and fees was primarily due to acquisitions during the latter part of 1998, which increased revenues and expenses, but did not have a material effect on earnings. The increase in other revenues resulted principally from acquisitions of accounting firms and ATM networks, and higher lending assessments and fees. Lending net finance charge revenue, excluding securitizations, rose by 16 percent for the first quarter of 1999, compared with a year ago. This increase is primarily due to the 19 percent growth in worldwide managed lending balances, partially offset by lower net interest yields, mainly resulting from a higher proportion of the portfolio on introductory rates compared with the prior year. Marketing and promotion expenses rose as a result of business building initiatives. The provision for losses on charge cards declined due to improved loss rates. The provision for the lending portfolio grew, primarily reflecting a higher level of loans outstanding, partly offset by lower loss rates. Human resources expenses rose, mainly due to a higher average number of employees, resulting from acquisitions and increased business volumes, merit increases and greater contract programmer costs for technology related projects. Other operating expenses rose, in part from the cost of Cardmember loyalty programs, business growth and investment spending. This increase was partially offset by the benefits of ongoing cost containment efforts. 13
<TABLE> <CAPTION> Travel Related Services Liquidity and Capital Resources Selected Balance Sheet Information ---------------------------------- (Unaudited) (Dollars in billions, except percentages) March 31, December 31, Percentage March 31, Percentage 1999 1998 Inc/(Dec) 1998 Inc/(Dec) --------- ------------ ---------- --------- ---------- <S> <C> <C> <C> <C> <C> Accounts Receivable, net $20.8 $21.3 (2.5)% $19.1 9.1 % U.S. Cardmember Loans $13.7 $13.7 0.2 $12.2 12.7 Total Assets $45.3 $44.7 1.3 $39.3 15.3 Short-term Debt $22.7 $22.9 (0.9) $18.6 21.6 Long-term Debt $ 5.5 $5.1 7.0 $6.3 (12.5) Total Liabilities $40.2 $39.8 1.0 $34.5 16.5 Total Shareholder's Equity $5.1 $4.9 3.8 $4.8 6.6 Return on Average Equity* 28.4% 27.8% - 25.7% - Return on Average Assets* 3.3% 3.3% - 3.1% - </TABLE> * Computed based on the past twelve months of net income and excludes the effect of SFAS No. 115. In January 1999, TRS issued and sold, exclusively outside the United States and to non-U.S. persons, $500 million 5.625% Fixed Rate Notes. These notes are listed on the Luxembourg Stock Exchange and will mature in 2004. In April 1999, the American Express Credit Account Master Trust (the Trust) securitized an additional $1 billion of loans through the issuance of asset backed certificates. The Trust expects to securitize an additional $1.5 billion of loans at a closing expected to occur in May 1999. The securitized assets consist of loans arising in a portfolio of designated Optima Card, Optima Line of Credit and Sign and Travel/Special Purchase revolving credit accounts owned by American Express Centurion Bank, a wholly-owned subsidiary of TRS. 14
<TABLE> <CAPTION> American Express Financial Advisors Results of Operations For The Three Months Ended March 31, 1999 and 1998 Statement of Income ------------------- (Unaudited) (Dollars in millions) Three Months Ended March 31, ------------------- Percentage 1999 1998 Inc/(Dec) ------ ------ --------- <S> <C> <C> <C> Net Revenues: Investment Income $595 $613 (2.9)% Management and Distribution Fees 522 418 25.0 Other Revenues 228 190 19.5 ----- ----- Total Revenues 1,345 1,221 10.1 Provision for Losses and Benefits: Annuities 270 297 (9.0) Insurance 126 117 7.1 Investment Certificates 64 73 (12.5) ----- ----- Total 460 487 (5.6) ----- ----- Net Revenues 885 734 20.6 ----- ----- Expenses: Human Resources 416 351 18.5 Other Operating Expenses 157 112 40.7 ----- ----- Total Expenses 573 463 23.9 ----- ----- Pretax Income 312 271 14.9 Income Tax Provision 98 85 14.8 ----- ----- Net Income $214 $186 14.9 ===== ===== </TABLE> 15
<TABLE> <CAPTION> American Express Financial Advisors Selected Statistical Information -------------------------------- (Unaudited) (Amounts in millions, except percentages and where indicated) Three Months Ended March 31, ------------------- Percentage 1999 1998 Inc/(Dec) ------ ------ ---------- <S> <C> <C> <C> Investments (billions) $30.6 $31.1 (1.6)% Client Contract Reserves (billions) $30.5 $30.3 0.6 Shareholder's Equity (billions) $4.1 $3.8 5.5 Return on Average Equity* 22.6% 22.1% - Life Insurance in Force (billions) $82.9 $76.1 9.0 Deferred Annuities in Force (billions) $44.0 $43.1 2.1 Assets Owned, Managed or Administered (billions): Assets managed for institutions $46.9 $42.3 10.7 Assets owned, managed or administered for individuals: Owned Assets: Separate Account Assets 28.2 26.0 8.6 Other Owned Assets 37.4 37.0 1.0 ----- ----- Total Owned Assets 65.6 63.0 4.1 Managed Assets 91.2 80.2 13.8 Administered Assets 15.7 9.9 57.8 ----- ----- Total $219.4 $195.4 12.2 ===== ===== Market Appreciation (Depreciation) During the Period: Owned Assets: Separate Account Assets $912 $2,610 (65.1) Other Owned Assets $(204) $18 # Total Managed Assets $2,889 $8,844 (67.3) Sales of Selected Products: Mutual Funds $6,033 $5,095 18.4 Annuities $579 $651 (11.1) Investment Certificates $660 $458 44.2 Life and Other Insurance Products $92 $83 10.5 Number of Financial Advisors 10,372 9,838 5.4 Fees from Financial Plans $21.3 $17.5 21.3 Product Sales Generated from Financial Plans as a Percentage of Total Sales 66.5% 65.1% - </TABLE> # Denotes variances of more than 100%. * Computed based on the past twelve months of net income and excludes the effect of SFAS No. 115. 16
American Express Financial Advisors American Express Financial Advisors' (AEFA) net income in the first quarter of 1999 rose 15% from a year ago. Net revenues and earnings grew due to higher fee revenues and wider investment margins. Management fees rose as a result of increased managed asset levels, including separate account assets, and distribution fees grew reflecting record mutual fund sales and higher asset levels. Managed assets rose since last year reflecting positive net sales and market appreciation. Other revenues benefited from higher insurance premiums and financial planning fees. Investment income, net of provisions for losses and benefits, rose due to improved spreads on annuity, insurance and certificate products and higher insurance and certificate in-force levels. Human resource expenses rose, largely as a result of a volume-driven increase in advisors' compensation reflecting growth in sales and asset levels. The rise in other operating expenses is primarily due to increased costs related to higher business volumes and investments to build the business. 17
<TABLE> <CAPTION> American Express Financial Advisors Liquidity and Capital Resources Selected Balance Sheet Information ---------------------------------- (Unaudited) (Amounts in billions, except percentages) March 31, December 31, Percentage March 31, Percentage 1999 1998 Inc/(Dec) 1998 Inc/(Dec) --------- ------------ ---------- --------- ---------- <S> <C> <C> <C> <C> <C> Investments $30.6 $30.9 (0.8)% $31.1 (1.6)% Separate Account Assets $28.2 $27.3 3.3 $26.0 8.6 Total Assets $65.6 $64.6 1.6 $63.0 4.1 Client Contract Reserves $30.5 $30.3 0.6 $30.3 0.6 Total Liabilities $61.6 $60.6 1.7 $59.2 4.0 Total Shareholder's Equity $4.1 $4.1 (0.9) $3.8 5.5 Return on Average Equity* 22.6% 22.5% - 22.1% - </TABLE> * Computed based on the past twelve months of net income and excludes the effect of SFAS No. 115. Separate account assets and liabilities increased due to higher net sales and market appreciation. 18
<TABLE> <CAPTION> American Express Bank/Travelers Cheque (AEB/TC) Results of Operations For The Three Months Ended March 31, 1999 and 1998 Statement of Income ------------------- (Unaudited) (Dollars in millions, except percentages) Three Months Ended March 31, ------------------ Percentage 1999 1998 Inc/(Dec) ------ ------ --------- <S> <C> <C> <C> Net Revenues: Interest Income $193 $210 (8.0)% Interest Expense 119 139 (13.9) --- --- Net Interest Income 74 71 3.6 Travelers Cheque Investment Income 79 80 (1.0) Foreign Exchange Income 18 48 (61.9) Commissions, Fees and Other Revenues 76 58 30.7 --- --- Total Net Revenues 247 257 (4.1) --- --- Expenses: Human Resources 82 74 10.5 Other Operating Expenses 136 124 9.5 Provision for Losses 17 233 (92.8) --- --- Total Expenses 235 431 (45.6) --- --- Pretax Income/(Loss) 12 (174) # Income Tax Benefit (29) (91) (68.6) --- --- Net Income/(Loss) $41 $(83) # === === </TABLE> <TABLE> <CAPTION> Selected Statistical Information -------------------------------- Three Months Ended March 31, ------------------ Percentage 1999 1998 Inc/(Dec) ------ ------ --------- <S> <C> <C> <C> American Express Bank: Assets Managed / Administered * $6.3 $5.1 22.3 % Assets of Non-Consolidated Joint Ventures $2.6 $2.6 1.9 Travelers Cheque: Sales $4.6 $4.8 (4.2) Average Outstanding $5.8 $5.7 3.3 Average Investments $5.6 $5.4 2.1 Tax equivalent yield 8.9% 9.2% - </TABLE> # Denotes variance of more than 100%. * Includes assets managed by American Express Financial Advisors. 19
American Express Bank/Travelers Cheque (AEB/TC) AEB/TC reported net income of $41 million for the first quarter of 1999, compared with a net loss of $83 million a year ago. The prior year results included a $138 million ($213 million pretax) credit loss provision related to AEB's business in the Asia/Pacific region, particularly Indonesia. Travelers Cheque results were consistent with the prior year. Foreign exchange income declined due to lower client trading volumes and reduced spreads, resulting from increased stability in currency markets, particularly in Asia. Commissions, fees and other revenues increased in part due to higher Private Banking fees and losses in the prior year on Indonesian securities positions. Operating expenses rose due to costs associated with new consumer product introductions. 20
<TABLE> <CAPTION> American Express Bank/Travelers Cheque (AEB/TC) Liquidity and Capital Resources Selected Balance Sheet Information ---------------------------------- (Unaudited) (Amounts in billions, except percentages and where indicated) March 31, December 31, Percentage March 31, Percentage 1999 1998 Inc/(Dec) 1998 Inc/(Dec) --------- ---------- ---------- --------- ---------- <S> <C> <C> <C> <C> <C> Travelers Cheque Investments $6.1 $6.3 (3.1)% $5.8 4.1% Total Loans $5.3 $5.6 (6.1) $6.0 (12.2) Total Nonperforming Loans (millions) $209 $180 15.9 $149 39.9 Other Nonperforming Assets (millions) $64 $63 1.3 $102 (37.6) Reserve for Credit Losses (millions)* $261 $259 0.9 $359 (27.1) Loan Loss Reserves as a Percentage of Total Loans 4.1% 3.8% - 4.9% - Total Assets $18.2 $18.5 (1.8) $18.6 (2.3) Deposits $7.9 $8.3 (5.2) $8.3 (5.7) Travelers Cheques Outstanding $5.8 $5.8 (0.9) $5.6 3.3 Total Liabilities $17.0 $17.3 (1.6) $17.5 (2.6) Total Shareholder's Equity (millions) $1,148 $1,197 (4.1) $1,119 2.6 Return on Average Assets** 0.90% 0.23% - 0.61% - Return on Average Common Equity** 19.7% 4.9% - 12.5% - Risk-Based Capital Ratios: Tier 1 9.8% 9.8% - 9.0% - Total 12.1% 12.6% - 12.2% - Leverage Ratio 5.4% 5.5% - 5.1% - # Denotes variance of more than 100%. * Allocation: Loans $218 $214 - $294 - Other Assets, primarily derivatives 41 43 - 59 - Other Liabilities 2 2 - 6 - --- --- --- Total Credit Loss Reserves $261 $259 - $359 - === === === </TABLE> ** Computed based on the past twelve months of net income and excludes the effect of SFAS No. 115. AEB loans outstanding declined to $5.3 billion at March 31, 1999, down from $5.6 billion at December 31, 1998 and $6.0 billion at March 31, 1998. The reduction since first quarter 1998 resulted from a $1.0 billion decrease in corporate and correspondent bank loans and a $320 million increase in consumer and private banking loans, largely in the Asia/Pacific region. Since December 31, 1998, corporate and correspondent bank loans fell by $360 million and consumer and private banking loans rose by $40 million. As presented in the table below, there are other banking activities, such as forward contracts, various contingencies and market placements, which added approximately $7.6 billion to AEB's credit exposures at March 31, 1999 (compared with $7.4 billion at March 31, 1998 and unchanged from December 31, 1998). Total nonperforming loans for AEB rose primarily reflecting the anticipated deterioration in the Indonesian loan portfolio. Other nonperforming assets declined from March 31, 1998 due to write-offs related to Indonesia, as anticipated in the provision recorded in the first quarter of 1998. 21
<TABLE> <CAPTION> American Express Bank Exposures By Country and Region (Unaudited) ($ in billions) Net Guarantees 3/31/99 12/31/98 FX and and Total Total Country Loans Derivatives Contingents Other* Exposure** Exposure** - ------- ----- ----------- ----------- ------ ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Hong Kong $0.8 $- $- $0.1 $1.0 $1.1 Indonesia 0.2 - - 0.1 0.4 0.4 Singapore 0.3 - 0.1 0.1 0.5 0.6 Korea 0.1 - 0.1 0.2 0.4 0.3 Taiwan 0.3 - 0.1 0.1 0.6 0.5 China - - - - - - Japan - - - 0.1 0.1 0.1 Thailand - - - - - - Other 0.1 - - 0.1 0.1 0.1 --- --- --- --- ---- ---- Total Asia/ Pacific Region** 1.9 0.1 0.3 0.8 3.1 3.2 --- --- --- --- ---- ---- Chile 0.2 - - 0.1 0.4 0.4 Brazil 0.3 - - 0.1 0.4 0.4 Mexico 0.1 - - - 0.1 0.1 Peru 0.1 - - - 0.1 0.1 Argentina 0.1 - - - 0.1 0.1 Other 0.1 - 0.1 0.2 0.4 0.4 --- --- --- --- ---- ---- Total Latin America** 0.9 - 0.2 0.4 1.4 1.4 --- --- --- --- ---- ---- India 0.3 - - 0.4 0.8 0.8 Pakistan 0.1 - - 0.1 0.2 0.2 Other 0.1 - - 0.1 0.2 0.2 --- --- --- --- ---- ---- Total Subcontinent** 0.5 - 0.1 0.6 1.2 1.2 --- --- --- --- ---- ---- Egypt 0.5 - - 0.2 0.6 0.7 Other 0.2 - 0.1 - 0.3 0.3 --- --- --- --- ---- ---- Total Middle East & Africa** 0.7 - 0.1 0.2 0.9 1.0 --- --- --- --- ---- ---- Total Europe*** 1.0 0.1 1.1 2.0 4.3 4.4 Total North America** 0.2 0.1 0.1 1.5 1.8 1.9 --- --- --- --- ---- ---- Total Worldwide** $5.3 $0.3 $1.8 $5.5 $12.8 $13.2 === === === === ==== ==== </TABLE> * Includes cash, placements and securities. ** Individual items may not add to totals due to rounding. *** Total exposures at 3/31/99 and 12/31/98 include $20 million of exposures to Russia. Note: Includes cross-border and local exposure and does not net local funding or liabilities against any local exposure. 22
Corporate and Other Corporate and Other reported net expenses of $43 million for the three months ended March 31, 1999, compared with net income of $42 million last year. The current year results include a $39 million ($46 million pretax) preferred stock dividend based on earnings from Lehman Brothers, which was offset by expenses related to the Year 2000 issue and business building initiatives. The prior year results included income of $78 million ($106 million pretax) comprising a $39 million ($60 million pretax) gain from sales of common stock of First Data Corporation and an equivalent Lehman Brothers dividend. 23
PART II.--OTHER INFORMATION AMERICAN EXPRESS COMPANY Item 1. Legal Proceedings On March 29, 1999 an action entitled LAMBERT V. AMERICAN EXPRESS FINANCIAL CORPORATION; AMERICAN EXPRESS FINANCIAL ADVISORS INC.; IDS LIFE INSURANCE AGENCIES, INC.; IDS LIFE INSURANCE COMPANY; AMERICAN EXPRESS PLAN COMMITTEE; CAREER DISTRIBUTORS PLAN COMMITTEE AND JOHN/JANE DOES 1-20 ("Companies") commenced in U.S. District Court, District of Minnesota, Fourth Division. The sole named plaintiff purports to represent a class consisting of financial advisors who were independent contractors from January 1, 1993 to the present. The complaint alleges class members were misclassified as independent contractors and seeks retroactive coverage in all employee health, welfare, retirement and compensation plans, and payment of FICA and FUTA taxes. The complaint also alleges violation of ERISA, breach of contract, breach of duty of good faith and fair dealing and unjust enrichment. The Companies will file an answer or otherwise plead by May 19, 1999. The Company believes it has meritorious defenses to such action and intends to pursue them vigorously. Item 4. Submission of Matters to a Vote of Security Holders The Company's annual meeting of shareholders was held on April 26, 1999. The matters that were voted upon at the meeting, and the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes, as to each such matter, where applicable, are set forth below. <TABLE> <CAPTION> Votes Votes Votes Broker For Against Withheld Abstentions Non-Votes ----------- ----------- --------- ----------- ---------- <S> <C> <C> <C> <C> <C> Selection of Ernst & Young LLP as independent auditors 383,433,218 797,648 - 1,869,165 - Shareholder proposal relating to cumulative voting 65,323,532 263,063,621 - 4,074,367 53,639,588 Shareholder proposal relating to political contributions 9,912,349 306,843,857 - 15,702,616 53,642,286 Shareholder proposal relating to stock options 9,471,599 315,045,476 - 7,941,763 53,642,270 Election of Directors: D.F. Akerson 383,147,834 - 2,953,274 - - A.L. Armstrong 382,760,999 - 3,340,109 - - E.L. Artzt 383,044,828 - 3,056,280 - - W.G. Bowen 383,039,912 - 3,061,196 - - K.I. Chenault 383,099,374 - 3,001,734 - - R.L. Crandall 382,815,380 - 3,285,728 - - H. Golub 383,072,727 - 3,028,381 - - B. Sills Greenough 382,585,326 - 3,515,782 - - F.R. Johnson 382,211,089 - 3,890,019 - - V.E. Jordan, Jr. 379,410,680 - 6,690,428 - - J. Leschly 383,111,165 - 2,989,943 - - D. Lewis 382,835,016 - 3,266,092 - - R.A. McGinn 382,938,506 - 3,162,602 - - F.P. Popoff 382,950,238 - 3,150,870 - - </TABLE> 24
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits See Exhibit Index on page E-1 hereof. (b) Reports on Form 8-K: Form 8-K, dated January 25, 1999, Item 5, reporting the Company's earnings for the quarter and year ended December 31, 1998. Form 8-K, dated February 3, 1999, Item 5, reporting certain information from speeches presented by Harvey Golub, the Company's Chairman and Chief Executive Officer and James M. Cracchiolo, President, International TRS, to the financial community on February 3, 1999. Form 8-K, dated February 22, 1999, Item 5, reporting the election of Robert L. Crandall to the Board of Directors of the Company. Form 8-K, dated April 22, 1999, Item 5, reporting the Company's earnings for the quarter ended March 31, 1999. Form 8-K, dated April 26, 1999, Item 5, reporting the Company's chief executive officer succession plans. 25
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN EXPRESS COMPANY ------------------------ (Registrant) Date: May 14, 1999 By /s/ Richard Karl Goeltz ----------------------- ------------------------ Richard Karl Goeltz Vice Chairman and Chief Financial Officer Date: May 14, 1999 /s/ Daniel T. Henry ----------------------- ----------------------- Daniel T. Henry Senior Vice President and Comptroller (Chief Accounting Officer) 26
EXHIBIT INDEX The following exhibits are filed as part of this Quarterly Report: Exhibit Description ------- ----------- 12 Computation in Support of Ratio of Earnings to Fixed Charges. 15 Letter re Unaudited Interim Financial Information. 27 Financial Data Schedule. E-1